The inner workings of captives domiciles

The decision to form a captive is about more than simply onshore versus offshore. US Captive offers an insight into just how complex this decision can be via a snapshot of a select few jurisdictions.

When selecting a domicile—even if the onshore versus offshore decision has already been made—the reality is that only drilling down into the detail can reveal the true pros and cons of each jurisdiction.

US Captive magazine recommends the close supervision of some very clever accountants and lawyers when doing this. To give a flavour of the sort of information to look out for, what follows is a brief analysis of a selection of domiciles featured in this issue.

South Carolina

The South Carolina Department of Insurance describes the jurisdiction as a leader among US domiciles.

“South Carolina offers captive owners the full package: a statute that is broad and up to date; business-savvy regulators who are accessible, reasonable, and highly professional; and world-class captive know-how in a service provider community that is second to none,” the domicile said in a survey by this publication.

It has the scale to back up such a statement. It has 167 active captives and registered 30 in 2015 alone. It is also worth noting that it prides itself on its speed to delivery. The average length of time that it takes to process a new captive is 30 days for single parent, group, or cell company.

In terms of its minimum capitalisation rates, different levels apply to different types of vehicle and it is worth looking at the fine print. An association captive, for instance, has a minimum capitalisation of $750,000, for a group captive the figure is $500,000 and for a branch captive it is $250,000.

Its licence fees also need careful examination but an initial application fee is around $200, a licence fee $300 but a review fee $4,000.

The most common sector that it serves is the service sector, which includes healthcare, legal, business and hotels, which accounts for 32 percent of its captives. Finance makes up 26 percent of its captives, transportation 14 percent, manufacturing 9 percent, construction 6 percent and others 13 percent.

Missouri

This domicile describes itself as the premier captive domicile in mid-America and sells itself in part on its accessibility.

“Missouri has more direct flights in and out of the state than most major captive domiciles. With an experienced staff, low examination cost, and flexible laws allowing individualised company regulation, the captive program of the Missouri Department of Insurance has the ability to provide the level of regulation needed for nearly any situation,” it said in response to a survey by this publication.

Missouri has 53 licensed captives and granted six new licences in 2015. The average length of time this domicile takes to process a new captive is around 30 days for pure, association and industrial captives and 45 to 60 days for special purpose life reinsurance (SPLR) captives.

In Missouri, the minimum capitalisation rate again varies depending on the type of captive but for a so-called pure captive it is around $250,000, for an association captive $500,000, for a sponsored cell captive $500,000 and for a SPLR captive $250,000.

The licensing fee is $7,500, which is credited toward premium tax payment, while Missouri says that the main industry its captives serve is the consumer services sector.

Cayman Islands

One of the biggest offshore jurisdictions, the Cayman Islands, regulated by the Cayman Islands Monetary Authority, describes itself as one of the world’s largest financial centres and stresses its long track record.

“Over the last four decades the Cayman Islands has matured into one of the world’s largest international financial centres and a leading captive and re/insurance domicile known for its appropriate, effective and efficient supervision in accordance with relevant international standards.”

Cayman is one of the biggest offshore jurisdictions and has an enviable track record. It dwarfs many of the onshore jurisdictions boasting 709 captives (although these figures include commercial reinsurers). Within this, it has 360 single parent captives, 128 risk retention groups and 145 cell captives plus other variations on the captive model.

In 2015 it granted 22 new licences. The average length of time Cayman takes to process a new captive is four to six weeks depending on the type of vehicle.

The minimum capitalisation rates is more complex on Cayman because of its system of categorising vehicles by class based on a number of factors that require more detailed research. The key industries captives on Cayman serve are healthcare and construction.

Small print: It is worth noting that a close read of the regulations around the formation of captives is worth a read on any domicile. While the original laws may have been passed when the domicile first looked to enter the captives business, there may also have been many amendments. In Cayman, for example, while the main law governing captives was Gazetted on October 11, 2010, there were several amendments to this in 2012.

This can be for many reasons but it is worth tracking closely. The Financial Services Commission of the British Virgin Islands (BVI), for example, has been updating regulation on the back of suggestions from the captive industry and having monitored captive legislation worldwide.

The Insurance (Amendment) Act, 2014 and Insurance (Amendment) Regulations, 2014 contain a number of key changes. They have now been approved by cabinet but are not yet in effect. For more information on changes in BVI, refer to an article from that domicile on p28.

Vermont

Vermont is another domicile that has made changes to its laws, as recently as 2016. Updating legislation first passed in 1981, the state says the amendments to Vermont law on captive insurance companies “allow association captives to file reports on a fiscal year-end basis; allow sponsored and industrial captives to enter a dormant status; provide a process for the conversion, sale, transfer, or assignment of protected cells; and amend the governance standards applicable to risk retention groups”.

This is well worth knowing if a firm is pondering forming a captive in what is a well-known onshore domicile in the captives world, with 1,071 total licences issued and comprising 587 active captives and 10 dormant captives at the time of going to press.

The Department of Financial Regulation, captive insurance division in Vermont, describes the domicile as “maintaining a regulatory system that attracts quality business, promotes Vermont’s reputation in the industry, and safeguards the solvency of captive insurers while recognising the special purpose for which they are created”.

To sum up, when choosing a domicile, do your research, compare like-for-like domiciles in detail and get expert advice.